Frontier markets - not all created equal
Updated: Apr 13, 2020
Foreign investors search for yield and some deepening of domestic financial sectors as well as #financification of economies has led to the rise in #Frontiermarkets debt (public and private). Longer term debt is a relative positive, but this is also the first time servicing foreign debt for some economies. The uses of debt will ultimately determine if it was worthwhile. i.e., was it spent of frivolous projects, subsidies etc or on more productive investments such as infrastructure, education etc. Debt management capacity will depend on #ESG factors including #institutions and #governance. #frontiermarkets, just like #emergingmarkets are diverse. Some countries do have lumpy repayments coming due in 2022, while others are out five years.
Caution is warranted as this story has played many times for developing economies, call it emerging, frontier or any other moniker.
Almost half of frontier market countries are either at high risk of falling into debt distress or are already distressed, the IMF has said, up from zero as recently as 2014.
The warning comes as issuance of hard currency frontier market debt is set to hit a record high this year, with $38bn set to be raised, according to the IMF. Several African states, in particular, are already struggling to service their debts.
The fate of many frontier markets will unfortunately depend on global economic and financial conditions. Should the global economy sharply slow or worse and should financial conditions tighten, i.e., USD liquidity becomes scares, some frontier markets will face debt service challenges. Economic slowdown can impact debt service costs even if the maturities of these loans are over 5 years.